Iran’s hyperinflation myth

I just published a short piece on Al Monitor to refute the widely held belief that Iran has been experiencing hyperinflation. As I explain there, the myth originated in the application of textbook economics of hyperinflation to Iran, not taking into account two important facts. First, that the Iranian government does not have to print a lot more money just because the free market rate for the dollar tripled. This is because it sells foreign exchange, not buy it. If the government had to buy its foreign exchange from private exporters, then to manage its operations it would have to print money at an accelerating rate to meet its obligations. Second, because the government is the main supplier of foreign exchange, and is therefore a price maker, not a price taker, it can price discriminate, and sell forex at different rates (three rates now). Of course, there are limits to its price making ability. It can pour more money into the free market and lower the rate there, or sell more at the subsidized rate of 12260 rials per $ to keep inflation down. But since it has a limited (and shrinking) supply of foreign exchange, mainly thanks to the sanctions, it has to be careful how it uses its forex. If the Central Bank tries to feed capital flight or speculation (as in did in the early 1990s), it may look in charge for a while but soon will be sorry.

The net result is that prices in Iran in the last three months since devaluation have not behaved anything like in hyperinflation. Here is how inflation has been behaving in the last 30 months:

True, the last three months have seen very high inflation, though not as high as in winter 1995, but the latest data, for the month ending December 20, 2012, indicate that inflation has decreased substantially — down to 2.5% per month from 4.5%. If inflation remains at the latter rate, the average rate for the year will reach above 30%, which is three time the rate of inflation just two years ago. There is a good chance that it might stay on the low side. Thanks to the strength of the salaried middle class and president Ahmadinejad’s free spending habits, awareness of inflation has heightened in all decision making circles in Iran.

A final point about the hyperinflation myth that is worth emphasizing is how little the US media says about a hyped story that turned out not to be true. (Contrast this with the hoax about the death of the fake girlfriend of a college football player that has been all over the US media this past week.) If this were a story about the economy of China, India, or Brazil, commentators from these countries would have been all over the guy who published the original flawed analysis and the reporters who reported it without questioning his assumptions. As I point out in my Al Monitor piece, the hype was not without potential serious consequence — it could have persuaded Obama to harden his position on Iran’s nuclear negotiations, tying his own hands post-election and bringing the US closer to the path of war with Iran. Such is the state of Iran’s international intellectual isolation in matters economic.

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25 Responses

I have a question (as a non economist) and I think it is an interesting discussion so I put here in hope you or other experts can answer.
Why Iran does not change its currency to gold or silver ( or similar things) ? What are the drawbacks? Lets say we change the currency to silver so people can actually exchange their paper money to equivalent silver at any time and at any bank (so government does not print any money without existence of silver/gold) . It seems to me this will solve the inflation problem once and for all and make the currency independent of certain policy makings . So what is the problem with this scheme and why they are not using this?

Going back to using precious metal instead of money is to give up on 3 centuries of human progress in financial innovation (like modern banks) just to control inflation. There are easier ways to do that, like controlling the growth rate of liquidity.

[…] and selected data to yield unfounded, preposterous claims. Specifically, he claims that Iran never experienced a brief bout of hyperinflation and that Iran’s inflation rate is much lower than the estimates reported by virtually everyone […]

I guess there is a very simple reason that Iran will eventually experience the hyper inflation:

The whole idea of economic sanctions is to induce economic difficulty (i.e. hyperinflation) in Iran.
Provided that the international community is so coherent with U.S. road-maps, Yankees don’t seem to have a hard time getting what they want!
If all your reasoning are to prove that there has not been a hypo yet, you’re right. But we should be more cautious about what will happen in the near future (F.Y.I.: the Pride has soared to 17.5 mil IRR theses days!).

But then if you don’t have a job it does not matter how much a pride costs. Inflation is a big problem, but it is in part a symptom of an unproductive economy. What keeps people from working is a large part of the reason why economic stimuli result in more inflation than jobs and output. If there were half as much attention paid to employment as to inflation, Iran’s economy would be in a better shape.

Dear Djavad, I guess there is a very simple reason that Iran will eventually experience the hyper inflation: The whole idea of economic sanctions is to induce economic difficulty (i.e. hyperinflation) in Iran. Provided that the international community is so coherent with U.S. road-maps, Yankees don’t seem to have a hard time getting what they […]

Just to make your story more dramatic:) The price of pride is 175 mil IRR not 17.5

I totally disagree with above statement. Yankees don’t have any clue what they getting into. Time will tell. I may have big belly with big arms…. Egyptians had it, Persians had it, Chinese had it, Ottomans had it, English had it, and now Americans. What happened to all of them throughout the history; they lost their lust, Americans will eventually do. As I said before, It is not Iranians who need the Yankees, it is the Yankee who needs the Iranians. We should all remember the battle of Alexander with Persians; small army destroyed big big empire. History is our witness…. A big balloon will eventually burst. If American don’t put themselves in better position, history will take care of them. The best option for Yankees is to negotiate with Iranians ASAP and let them go loose. We all know Iranians are not afetr big bomb, They are after their independence. Yankees should take their hands off Iranian balls and throats, otherwise they pay a very big price for it, not miltarly but finacially.

We all know the Iranians same as the Alexander do not have big guns, what they have is their believes and honors, same as the Alexander 2500 years ago.

It says: this big house that looks so big and elegant from outside has real foundation problems
But we ( the so-called experts ) always look at- above the foundation (the building itself)

Yankees can not fixed their own fiscal problems, they want to solve Iranians situations. The problem is not Iran’s ambition for nuclear bomb or energy, the problem is that if Yankees let Iran go, they should let others go too. Yankees want to stay on top to rule. Yankees want to sell a $1 green piece of paper for 100 Dollars. Yankees want my mom puts thousands of these worthless $100 bills under her pillow so they can create more QEs.

At the end you should remember this notion that one politicians used to say: Barbarians at the Gates. Now change the Barbarians to Creditors and you will have: Creditors at the Gate. Meaning US and its allies owe so much money to the world that Chinese, Arabs, Japanese, and others are calling their loans. The fiscal cliff is not the disagreement among politicians, it is the disagreement of how to come up with more money without going to war with others.

The choice for Yankees and its allies is to NEGOTIATE and let go their EGO.

Didn’t Ahmadinejad try to pay attention to employment, by his “fast-yielding projects” plan? I believe the reason this huge inflation didn’t show up at the time, was that the President chump controlled it by huge imports. Fast-yielding projects resulted in slow-occurring disaster!

Yes, the quick-yielding program was badly designed, and resulted in a lot of bad loans and little additional employment. It assumed the bottleneck was in credit. You are right, rising oil income washed over its problems, but it also reduced incentive for domestic production.

Ok, one last word I could not resist about Amir’s comments which sometimes seem duplicates, but I count them as the emphasis that he wants to exert. Typical argument, fresh out of Iran, and here we have no clue about what is going on! By Own government statistics, Iran has the 4th highest inflation in the world, The main source of revenue, oil has gone 50% DOWN in the last year, and more importantly since the Presidential elections of 2008, Majority of people do not trust this government and that is the biggest problem for the rulers in Iran. Besides because of Mafia type economic groups, the government is simply paralyzed to control the trade of foreign currency. Many workers and retired government workers have not been paid wages for months. Can it be worse, sure, but is this bad? Yes, when left and right people with high positions simply want to resign!
Note that the emphasis of the leadership has been political participation in the elections and not so much one of the tolerance of the less than standard economy, Khamenei simply doesn’t care if people have enough food on their tables, but he is worried about being able to support local dictators and have enough finances to carry on the military nuclear program. The leadership very well knows that their legitimacy is in danger. Even in 1957 people’s strikes were not for economic reasons but for political ones.

1. The narrative of “hyperinflation”, as put forward by Steve Hanke, is a red herring. The problems in Iran, at consumer level, have been supply-and-distribution problems fuelled by rising costs of producer inputs.

So this is not necessarily a case of systemic hyper-inflation but of “spikes” in costs for particular products — many of which are essential products.

2. The article slips in the vital issue regarding currency markets — “Since it has a limited (and shrinking) supply of foreign exchange, mainly thanks to the sanctions, it has to be careful how it uses its forex” — but then moves away.

It shouldn’t. Iran’s foreign reserves, estimated at $80 billion at the end of 2011, are at an unknown level now. However, it is safe to say that — given 1) the 50% cut in revenues from oil exports and 2) the injection of reserves into the market, especially in October to stem the collapsing Rial, they are significantly lower now.

One MP said $40 billion in November, and there are indications of trouble — note, for example, the Central Bank’s alleged refusal to provide $2 billion for imports of drugs and medical supplies.

3. “The latest data, for the month ending December 20, 2012, indicate that inflation has decreased substantially — down to 2.5% per month from 4.5%.”

This key claim is unsourced, and it does not fit either official announcements or claims by economists inside Iran. The Central Bank and Statistics Centre both have inflation on a rising curve — at between 25 and 30% annually — and some MPs and economists are claiming 40% to 60%, with up to 100% for some products.

4. “Thanks to the strength of the salaried middle class and president Ahmadinejad’s free spending habits, awareness of inflation has heightened in all decision making circles in Iran.”

This is a curiously blithe comment, illuminating the tendency towards rose-coloured analysis. “Awareness of inflation” does not mean “dealing with inflation”. To the contrary, the dominant political story in Iran in the last few months has been trading of allegations between the executive and legislative branches, with Parliament and Ahmadinejad facing off over the second phase of the subsidy cuts programme.

5. Is it telling that an article supposedly dealing with all the “hype” over currency and economic issues, supposedly providing comprehensive information, should take no notice of last weekend’s furour over the head of the Central Bank — leading to another drop in the Rial?

Thanks for your questions. My answers follow:
1. Something is a red herring if one makes a big deal out of it but no one else does. This is clearly not the case here.
2. Yes, the issue of Iran’s foreign reserves is important, but I do not know much about it. I assume that it is a state secret. I read that the Central Bank governor mentioned 700 tons of gold imports (valued about $40 billion). In any case what they have now is not as important as what they expect to get in years to come.

3. The 2.5% inflation rate is *monthly* — the annualized rates are in the graph, and are very high. These (and the graphs) are based on official CPI data (as noted in ht eAl Monitor piece) released by the Central Bank.

4. Not sure what your question is here

5. Yes, it is very telling, but of the limitations imposed by time. I have a day job to attend to! I will write about the issue you raised re the Central Bank as soon as I get the chance.

Re my Point 4 — I read your original remark as optimism that “awareness of inflation” would lead to effective action on inflation.

To the contrary, in my opinion, the last few months have been marked by in-fighting over economic management and mis-management that do not bode well for effective action. Examples include Parliament v. President over the second phase of the subsidy cuts programme, Ahmadinejad v. the Revolutionary Guards and Ahmadinejad v. officials like the Larijanis over corruption and land fraud, speculation by inside groups on the currency market, profit-making by inside groups on imports and infrastructure projects, and the dispute over the relationship between the Central Bank and other banks.

Scott: You are correct about the infighting, and justified in being pessimistic about control of inflation, but I think the collective will over fighting inflation is quite strong. The only party to this debate that does not believe inflation is enemy number one is the president, who wants to leave maskan mehr and the cash transfer programs as his legacy. I am also not sure who the CBI governor really reports to. He has the power to slow down the expansion of money supply.

Personally I think inflation is not the real problem, it is only a symptom of deeper problems, such as unemployment. Fighting it by limiting government expenditures is not dealing with the source of the problem — economic and political structural bottleneck that inhibit private investment, and now of course you have sanctions to boot.

Dear Scott Lucas, I just came from Iran 10 days ago and I find it hard to believe that the currency issue and US held sanctions have any direct effect in Iran’s economy. Iran is a country that does not have any direct solid tax system that provide real revenue for its system. Meaning the people’s incomes could not be monitored by the government in order to create a true GDP. One observation that I saw it every where I went, was ” the construction of high rises and highways”. It was not in Tehran only, it was every where I went, south to Kish Island to the north to Caspian see. How could people invest money to build high rises when currency is right now at 35000 Rials per Dollar? How roads are build in the fastest paste when the Dollar is at highest rate right now? How at the currency rate of 35000 Rial people of Iran can afford so much food wasted on their table that eventually transferred to the garbage? Who pays for these high rises all over in Iran? In any street of Tehran you can see 4 to 5 giant cranes, How could it be possible? You travel from Tehran to Ghazvin, a city that is 140 Kilometer away from Teharn, you see not only total illumination of the road by the long super duty lights, but also you see high rises every where along the road in many different locations( Abe yek, Hasht gherd,…).

One super merchant who is involved in heavy machinery even told me that the sanctions helped them to increase the quality of his products and also the export of his products that would bring him a lot of foreign money that he could bring into Iran to share some with government ( the law) and some for himself at the 35000 Rials per Dollar.

Mr. Scott, Iran has been around for many years. The Iranian have been living in that plato for well over 2500 years. They don’t need US Dollar or its western supporters to survive. One thing they know and they are very good at it is ” DIRECT TRADE”. I hope you understand what I am trying to get at; I have oil, you have rice, let’s trade and make a deal, so on so forth. The Iranian merchant, before the destruction of Persians ( Qajar Dynesty) by West, used to rule the world by Direct Trade. They even took their religion(Islam) to them too. So please do not under estimate the Iranians. They are very good at direct trade and proxy.

One last thing that you may want to investigate is the love of every single Iranian abroad for their mother land, Iran. They may be against the central government of Iran but their love always exist. I think the US sanctions on the US Dollar was not created to control the government of Iran, it was created to control the follow of money into Iran by non-government people. There two options left for US: strike Iran or direct talk that it will be most favor towards Iran, there is no middle that US and its allies trying to gain.

Remember China opium war more than 100 years ago! What English did to Chinese, Chinese did to Americans; follow of money from year 2001 into the US and the stop of the money into US in year 2007 which resulted the 2008 economic crash in US and western world. Now US is holding Iranians by their balls and throats, This should stop ASAP otherwise Chinese and Russians will take over the whole region which the END RESULT would make the Western world take a long vacation.

Thank you for this comment. I have no doubt that some people are profiting from the economic situation. As you mention, some are putting their Rials into property and construction — in part because those Rials are far less profitable in transactions foreign currencies and commodities. Those who can export despite economic difficulties are benefitting from the devalued Rial.

But some profiting does not make up for many who are suffering — I fear I can match your stories with those of Iranians suffering from a combination of mismanagement, political in-fighting, corruption, and sanctions.

Dear Scott Lucas, I just came from Iran 10 days ago and I find it hard to believe that the currency issue and US held sanctions have any direct effect in Iran’s economy. Iran is a country that does not have any direct solid tax system that provide real revenue for its system. Meaning the people’s incomes could not be monitored by the government in order to create a true GDP. One observation that I saw it every where I went, was ” the construction of high rises and highways”. It was not in Tehran only, it was every where I went, south to Kish Island to the north to Caspian see. How could people invest money to build high rises when currency is right now at 35000 Rials per Dollar? How roads are built in the fastest paste when the Dollar is at highest rate right now? How at the currency rate of 35000 Rials people of Iran can afford so much food wasted on their table that eventually transferred to the garbage? Who pays for these high rises all over in Iran? In any street of Tehran you can see 4 to 5 giant cranes, How could it be possible? You travel from Tehran to Ghazvin, a city that is 140 Kilometer away from Tehran, you see not only total illumination of the road by the long super duty lights, but also you see high rises every where along the road in many different locations( Abe yek, Hasht gherd,…). One super merchant who is involved in heavy machinery even told me that the sanctions helped them to increase the quality of his products and also the export of his products that would bring him a lot of foreign money that he could bring into Iran to share some with government ( the law) and some for himself at the 35000 Rials per Dollar.

Mr. Scott, Iran has been around for many years. The Iranian have been living in that plato for well over 2500 years. They don’t need US Dollar or its western supporters to survive. One thing they know and they are very good at it is ” DIRECT TRADE”. I hope you understand what I am trying to get at; I have oil, you have rice, let’s trade and make a deal, so on so forth. The Iranian merchant, before the destruction of Persians ( Qajar Dynasty) by West, used to rule the world by Direct Trade. They even took their religion(Islam) to them too. So please do not under estimate the Iranians. They are very good at direct trade and proxy.

One last thing that you may want to investigate is the love of every single Iranian abroad for their mother land, Iran. They may be against the central government of Iran but their love always exist. I think the US sanctions on the US Dollar trading in Iran was not created to control the government of Iran, it was created to control the flow of money into Iran by non-government people. There two options left for US: strike Iran or direct talk that it will be most favor towards Iran, there is no middle that US and its allies trying to gain.

Remember China opium war more than 100 years ago! What English did to Chinese, Chinese did to Americans; flow of money from year 2001 into the US and the stop of the money into US in year 2007 which resulted the 2008 economic crash in US and western world. Now US is holding Iranians by their balls and throats, This should stop ASAP otherwise Chinese and Russians will take over the whole region which the END RESULT would make the Western world take a long vacation.

Dear Scott, you used the word “some people profiting from the economic situation in Iran”. I can tell you most of the people at any level trying to gain at any rate to promote their situation financially, from my dad employee who makes 800,000 Tomans( one toman equals 10 Rials) a month to semi rich merchant who is in billions. Rich complaints more than the poor. Right now the tone of voice in Iran is all about EXPORT. As they say; What can I make to create hard foreign currency in order to have better life in Iran NOT abroad. They may need a Green card or some type of western residency to travel abroad easy, but they all agree on one thing, ” nothing is better than living in Iran even the cost is high.

The problem with western mentality is that they think Iranians are ready to flee their country due to US held sanctions. This is totally totally untrue. Actually the heavy construction all over the country is a good example of people direct involvement in Iran’s economy. There is a saying in US, as you are aware, if you see constructions every where, it means economy is moving at fast paste. the same is true about Iran. Iranians were the ones who created piracy almost 500 years ago by coping Chinese products and selling it to the Europeans. I think you are missing my whole point, The Iranians have so much undeclared incomes that even the governmnet of Iran can not tackle because Iran unlike US does not have a real tax system. Where do they get the money; undocumented money from inside-outside-abroad, under, over, and in the middle. Next time you plan to go to Iran I ask some one to tour you that see what I mean. Iranians are like a secret society that only Iranians can figure it out. I am not joking.

Now lets tackle the notion you had in your memo about the suffering of Iranian people from the sanctions. Well! you and other western mentality seeing this equation from right to left. The variables are not what you guys think. The world does turn around western world any more. In any society because of unfairness of money distribution among its citizen of course you see combination of mismanagement, political in-fighting, corruption, and sanctions. But this can not directly relate due US held sanctions, this is due to people who are living in that society. It could be from government or it could be in Iran’s case mostly from its own people. The people of Iran are very opportunistic and intolerant because there is no respectful taxing system. They discriminate against each other at any level. They use religion to abuse others, they use money to control others. You never see an Iranian that says: I don’t know. They don’t have the term “I don’t know” in their dictionary. According to them they know EVERYTHING. You can never get an straight answer from an Iranian fellow friend. It is in their blood. Theocracy is in their blood even in their governmental system .

It is not Iran that needs US, it is US who needs Iran. The equation should be corrected. Look at our economy here in US. We have 48,000,000 people on well fair. Another 20 million will be added by end of president Obama term. Our economy can not be called economy because we have no means of real manufacturing in this country. There is no real construction, real power plant built, or real job creation economy. We are a service type system that can only be fed off other countries. Traveling to Detroit and Chicago and other places will tell us that we are going down economically. We can not create another Viet Nam or Iraq anymore in order to suck up their bloods for survival. We, as American, killed so many people abroad indirectly that even current Iranian governmnet with its bad humanitarian records can not be compared with US records aboard. I am not pro Iranian government, but facts are facts and we should respect it.

Dear Scott, you used the word “some people profiting from the economic situation in Iran”. I can tell you most of the people at any level trying to gain at any rate to promote their situation financially, from my dad employee who makes 800,000 Tomans( one toman equals 10 Rials) a month to semi rich merchant who is in billions. Rich complaints more than the poor. Right now the tone of voice in Iran is all about EXPORT. As they say; What can I make to create hard foreign currency in order to have better life in Iran NOT abroad. They may need a Green card or some type of western residency to travel abroad easy, but they all agree on one thing, ” nothing is better than living in Iran even the cost is high.
The problem with western mentality is that they think Iranians are ready to flee their country due to US held sanctions. This is totally totally untrue. Actually the heavy construction all over the country is a good example of people direct involvement in Iran’s economy. There is a saying in US, as you are aware, if you see constructions every where, it means economy is moving at fast paste. the same is true about Iran. Iranians were the ones who created piracy almost 500 years ago by coping Chinese products and selling it to the Europeans. I think you are missing my whole point, The Iranians have so much undeclared incomes that even the governmnet of Iran can not tackle because Iran unlike US does not have a real tax system. Where do they get the money; undocumented money from inside-outside-abroad, under, over, and in the middle. Next time you plan to go to Iran I ask some one to tour you that see what I mean. Iranians are like a secret society that only Iranians can figure it out. I am not joking.
Now lets tackle the notion you had in your memo about the suffering of Iranian people from the sanctions. Well! you and other western mentality seeing this equation from right to left. The variables are not what you guys think. The world does turn around western world any more. In any society because of unfairness of money distribution among its citizen of course you see combination of mismanagement, political in-fighting, corruption, and sanctions. But this can not directly relate due US held sanctions, this is due to people who are living in that society. It could be from government or it could be in Iran’s case mostly from its own people. The people of Iran are very opportunistic and intolerant because there is no respectful taxing system. They discriminate against each other at any level. They use religion to abuse others, they use money to control others. You never see an Iranian that says: I don’t know. They don’t have the term “I don’t know” in their dictionary. According to them they know EVERYTHING. You can never get an straight answer from an Iranian fellow friend. It is in their blood. Theocracy is in their blood even in their governmental system .
It is not Iran that needs US, it is US who needs Iran. The equation should be corrected. Look at our economy here in US. We have 48,000,000 people on well fair. Another 20 million will be added by end of president Obama term. Our economy can not be called economy because we have no means of real manufacturing in this country. There is no real construction, real power plant built, or real job creation economy. We are a service type system that can only be fed off other countries. Traveling to Detroit and Chicago and other places will tell us that we are going down economically. We can not create another Viet Nam or Iraq anymore in order to suck up their bloods for survival. We, as American, killed so many people abroad indirectly that even current Iranian governmnet with its bad humanitarian records can not be compared with US records aboard. I am not pro Iranian government, but facts are facts and we should respect it.

Dear Amir
About QE3, what can be said for sure is that there are buyers for the greenback as long as the US can keep the people living in richer countries in constant fear of pending catastrophe. This does not always mean actual war that would involve bringing back US citizens in coffins. It may come in the form of creating proxy wars financed by tyrannical client Sheikdoms or Kingdoms and fought by Indoctrinated Selafist zealots who are prepared to murder women and children and spread fear across the region not to win hearts and minds but to create enough insecurity to cause us to hide our wealth in secret bank accounts in the currency of the one and only ‘secure’ country in the world.
Should this not be enough, the US can announce that the Navy is soon to be re-deployed in the Pacific to ‘reduce’ tension there and guard against China’s pending encroachment on Islands belonging to Japan or Korea or Vietnam. Are the wealthy people of the Pacific rim as dutiful simpletons as we are in the M.E. in following the big scum, and horde worthless greenbacks in our pillows, time will tell. May be they are wiser and would opt for the RMB. That could indeed bring down the Empire.

Dear Baddu;
We will see if the empire will collapse. I hope not. The way they are going and representing themselves, the inevitable is fast approaching. We will see how players play this POKER. The 5 cards on the table are known. What type of cards does US have, Iranians have, or other players may have, this is the question!